Property law: The disadvantages of perpetual usufruct from the investor's viewpoint (part II)

The first one often comes up when the legal status of real estate is examined. There is the risk that the title to a property - which the State Treasury or a local government unit possesses - could be questioned. An investor usually meticulously examines the legal status of real estate, taking into account both the civil law aspect (land and mortgage register, legal proceedings, registration files) and the administrative aspect (zoning, actual designation of the area).

During such examinations it often turns out that a title transfer (made by the owner, which is either the State Treasury or a local government unit) can be questioned by the inheritors of the property's pre-war owners. Such a risk, even if only theoretical, can cool a potential investor's interest. This information can also dampen financial institutions' willingness to give credit.

No easy solution

There is usually no easy solution to this problem, as an investor does not have any guarantee that his perpetual usufruct and title to real estate won't be questioned. This pre-purchase moment is crucial for the potential investor because it is generally at this time that something collapses. And it is no surprise that a bank or investor is unwilling to spend, for example, zł.50 million on a piece of land in the center of Warsaw if there is even a slight risk that a third party might lay claim to this land.

That is why purchasers of the right to perpetual usufruct who are determined to realize their investments often make sellers accept part of the risk connected with third-party claims. As a result, a preliminary sales contract is first drawn up so that the purchaser has time to complete all the necessary legal procedures and can withdraw from signing the actual contract if there are any doubts or unresolved issues. In addition, the seller is obliged to resolve any claims brought by the heirs of a property's former owners. However, this course of action is costly and carries the additional risk of not being 100-percent guaranteed.

Abiding by conditions

The second problem stemming from the legal status of perpetual usufruct is that the perpetual usufructuary must abide by the conditions listed in the agreement or decision establishing the right to perpetual usufruct. The failure to abide by these conditions could cause the termination of the agreement.

This is best illustrated through an example - let's say an investor intends to realize an investment in a post-industrial area and build a housing estate on land held in perpetual usufruct. The usufructuary is obliged to use the land as defined in the agreement and "keep the building in good condition." Then the investor receives a ruling on the conditions for development (a "WZ decision") and can build the proposed apartment buildings.

The WZ decision defines the intended use of the plot as land hosting a housing estate. Therefore, the construction of a housing estate in conjunction with the WZ decision is simultaneously in accordance with the conditions listed in the agreement.

The demolition of buildings on the land, however, would be contrary to the land use defined in the agreement and could be a reason for the termination of the agreement establishing the right for perpetual usufruct. So a potential purchaser of such real estate will probably think twice before risking a considerable sum of money.

It should be remembered that perpetual usufruct is a right to derive benefit from a property which belongs to someone else. Thus, the investor should use the real estate according to the owner's provisions as well. Such a situation can be risky and challenging for investors as the owner may interfere with their decisions, and the legal status of perpetual usufruct enables him/her to do so. L

Radosław Skowron, advocate and partner at the law firm Kaczor Klimczyk Pucher Wypiór, rskowron@kkpw.pl